That Bank Recapitalisation Plan in full… Part 2 December 19, 2008

Okay, joking apart, and breaking off briefly from my self-imposed holiday (it’s very pleasant a chairde, thanks for asking) for the next week or so, can I just say that there was little Christmas cheer in what was laughably termed a ‘plan’ released by the government as regards the Bank Recapitalisation. For this was thin stuff indeed. Conditional and aspirational in equal measure. So… no surprise there.

And while it’s been noted that the plan is vague to the point of infuriation a number of other elements are very evident. Firstly, this was the recapitalisation that we were told previously was not necessary.

One has to wonder about a government which in early October was adamant that it would not be engaging in such a process. Even as recently as the 8th of October we read that…

Mr Lenihan said the issue of recapitalisation of banks had been discussed by several ministers at the meeting, and was actively being considered by some EU states. He said he did not think this policy was required in Ireland, but events were moving quickly.

‘Didn’t think it was required’… eh? Well at least he was clever enough to leave a bit of wriggle room… because he’d need it.

“That is our position at this stage. But we are monitoring the position. It would be a brave person that could predict where the banking system would be in a week, two weeks’ or three weeks’ time,” said Mr Lenihan, who praised an EU agreement yesterday to raise the minimum deposit guarantee for consumers to €50,000 from €20,000.

By the 24th of November events were moving… well… apace…

The concern was not that the banks could survive but that they could “exist as a motor in the economy”. He said State investment would be a last resort.

Now call me cynical but I’d bet that one could argue that the concern very much was that at least some of the banks would be able to survive.

“If private money is prepared to invest in the banks on appropriate terms and on terms that serve the public interest, then the Government would welcome that,” he said. “The Government hasn’t ruled out public investment, but what we have said is the banks will have to seek private investment in the first instance.”

And – from his point of view – shockingly…

Mr Lenihan said it was legitimate that the taxpayer should not be asked to inject all of the funds required to recapitalise the banks. That would, in effect, be nationalising them, he said.

Good Lord… No! But precisely what principle was being argued from here?

“It would be difficult to justify having six separate institutions when the taxpayer had wholly invested in all of them,” he said.

Well, one could make a contrary argument that these separate institutions were the outcome of a freeish market and also the architects of their own downfall, so – and I’ll bet this was the subtext – why not have three, or even just two, separate institutions with the taxpayer investing in them, leaving the others to stand or fall (and while we’re pondering that can I direct you to Michael Taft’s latest eminently sensible – for which read ‘it will never be adopted by any party in this state in our lifetime’ – proposals, including the idea of financial institutions established with public good as their prime motivator). But there was a sneaky little way to cut this particular Gordian knot…

Asked if the Pension Reserve Fund could be used, Mr Lenihan said it had lost a lot of money in the last year. If the shares in the fund were sold that could involve a substantial loss to the pensioners of the future, he said.

Yes, indeed.

“But there are more liquid assets in the pension fund that could be used in the appropriate circumstances,” he added.

And lo! So it came to pass. This weekend just gone we read, to our horror or amusement or most likely simple resignation, that the Government is indeed to recapitalise.

GOVERNMENT STATEMENT: THE GOVERNMENT has today [Sunday] decided on an approach to the recapitalisation of credit institutions. The Government’s objective is to ensure the long-term sustainability of the banking sector in Ireland and to underpin its contribution through the availability of credit to individuals and businesses in the real economy.

This initiative will help to foster and encourage the flow of funds to the economy and limit the impact of financial market difficulties on businesses and individuals.

The Government noted that recapitalisation is recognised by the European Commission as one of the key measures that may be used by member states to preserve stability and proper functioning of financial markets, and that it believes that in current market conditions even fundamentally sound banks may require additional capital to respond to widespread market perception that higher capital ratios are appropriate for the sector internationally.

The Government decision followed the Minister for Finance’s statement of November 28th, 2008, which confirmed the State’s willingness to supplement and encourage private investment in the recapitalisation of credit institutions in Ireland with State participation.

In that context, the Government has decided, either through the National Pensions Reserve Fund or otherwise and subject to terms and conditions, to support, alongside existing shareholders and private investors, a recapitalisation programme for credit institutions in Ireland of up to €10 billion.

The State’s investment may take the form of preference shares and/or ordinary shares and the State may where appropriate participate on an underwriting basis. In principle, existing shareholders will be expected to have the right to subscribe for new capital on the same terms as the Government.

A key principle in the operation of such a fund will be to secure the interests of the taxpayers through an appropriate return on, and appropriate terms for, the investment.

The next step in this process will be for the Minister for Finance to initiate detailed engagement with the credit institutions themselves in respect of specific proposals.

In order to safeguard fully the interests of the taxpayer, State investment will be assessed on a case-by-case basis in an objective and non-discriminatory manner, having regard to the systemic importance of the institution, the importance of maintaining the stability of the financial system in the State and the most effective and economical use of resources available to the State and each credit institution’s particular requirement for capital.

Any State investment will be undertaken in line with best practice in the EU and elsewhere and consistent with EU state aid rules and in particular the recent European Commission communication on recapitalisation.

Recapitalised institutions may be required to comply with such requirements as to transparency and commercial conduct as the Minister sees fit.

The National Pensions Reserve Fund Act 2000 will be amended, as necessary.

Discussions with the relevant credit institutions are ongoing and the institutions continue to progress proposals for private investment. Institutions are being asked to submit their proposals by early January.

The Government guarantee scheme remains in place.

Now gaze in awe and wonder at a statement which contains five instances of the word ‘may’, an ‘either’, a ‘subject to’, an ‘any’, a ‘specific proposal’ and the chilling phrase (to some) ‘in principle existing shareholders will be expected to have the right to subscribe for new capital on the same terms as the government’… and so on.

Note too that the reason for recapitalisation is oddly nebulous.

…recapitalisation is … one of the key measures that may be used by member states to preserve stability and proper functioning of financial markets, and that it believes that in current market conditions even fundamentally sound banks may require additional capital to respond to widespread market perception that higher capital ratios are appropriate for the sector internationally.

So, all this to respond to a market perception and preserve stability. But… what is the market perception, and what of stability. It’s as if the government remains unsure as to why it’s doing all this.

There is an interesting article in the Irish Times here by Michael Casey, who as a former chief economist with the Central Bank and former member of the IMF board is presumably in a better position than most to know what is going on, and he, tellingly, admits to being entirely puzzled by the governments maneuvers on this issue. He notes recapitalisation itself is “a curious [decision] because there is not a shred of hard evidence to indicate that the banks are short of capital”. He comes to this conclusion because of the following:

The Central Bank and Financial Regulator and the banks themselves have repeatedly denied that capital adequacy is a problem. The 20 PwC accountants who were sent into the banks to go over the books came to exactly the same benign conclusion.

The “establishment” view is that the banks are not short of capital and that they have adequate , indeed “robust”, capacity to absorb impaired debts now and in the future.

Which rather begs the question precisely what is going on. Because as he also notes ‘speculators continue to adopt the opposite view and this is what is driving down the share value of banks’.

Worse, that old fraud ‘sentiment’ (or as the government statement puts it ‘perception’) enters the picture:

The speculators, and some academic economists, seem to be basing their view on the experience of some other countries where banks were exposed to the property market. They clearly do not believe one word of the establishment line. Which side is right? We don’t know yet, but we will early in the new year…The rights or wrongs sometimes don’t matter. If big players get a bee in their bonnets about the assets of a small country, then it is often extremely difficult to defend the value of those assets.

Ah, the rationality of the market.

But Casey raises a disturbing point when he argues that:

What is not clear, however, is the strategic objective of the Government action. Is it to massage share values or to encourage the banks to lend more to Irish companies?

And this may well account for the odd vagueness in the statement reproduced above. Could it be that the Government itself simply doesn’t know what it’s objective is and is trying to delay until forced to make a decision? Because Casey is dismissive of the idea that bank recapitalisation in and of itself will ‘fix’ the economy. As he notes, lending more money to companies who can’t shift stock due to a collapse in demand isn’t going to generate demand. Which reminds me of something Robert Scheer on Left, Right & Centre has been saying for quite a while, that increased benefits and wages to lower paid public workers (as well as supports for those on lower wages in the private sector) are one of the best ways of stimulating demand.

But beyond that Casey also raises one further very interesting and, when made evident, obvious aspect of the recapitalisation programme. If a bank seeks assistance under the recapitalisation plan that will inevitably raise questions as to the efficacy of a regulatory framework which signed off on that bank in the recent past (note his words above about the Central Bank, the Financial Regulator and the 20 PwC accountants who undertook that task). And since the banks clearly would have known when the investigators went in that something was askew the only reasonable interpretation would be that both the regulatory frameworks were flawed and the banks… well, unforthcoming. And as he notes this presents a ‘moral dilemma’ for the chief executive of any bank in said position who would consequently have to resign (although perhaps not, knowing the current crop).

And Casey notes that nothing will happen without a ‘hard push from Government’ including consolidation. Indeed he also proposes that while:

…traditionally, Irish banks have been very conservative with regard to venture capital…it almost seems as if the Government wants to use the banks to administer a soft lending programme for industries in difficulty. If that is the aim then complete nationalisation of one or two entities might be the way to go.

It might indeed.

Meanwhile the economic ‘plan’ announced yesterday to great fanfare seems, if anything, more of the same recipe that we’ve seen implemented across the last couple of decades. But with the added bonus of the now daily raids on the National Pension Reserve Fund. And sure why not? They may not like the detail of the US and UK fiscal stimulants but they sure do like the idea of pushing certain debts down the line. And interesting to read that“The Government intends backing them up with a favourable tax regime designed to anchor the businesses here. This will include tax breaks for intellectual property and a 15 per cent charge on profits that the funds make. This is the same rate as is charged on venture capital profits in the US and will be the lowest levied in the EU.”

Just what sort of a society and economy are we developing here?

And what of our glorious captains of finance? Standing tall on the deck of the ship as it continues to hit not one iceberg, but another, and another, and coolly indifferent to the damage, both direct and collateral, being taken. Well not quite…

What to make of the news that Anglo Irish Bank chairman Sean Fitzpatrick (a name one might recognise from his ‘bold and brave’ attacks on our public services prior to the Budget) is stepping down after some fancy footwork with loans. Loans let it be said that totalled €87 million. What is it humanly possible to do with €87 million. You can’t eat more than three square meals a day. Or sleep in more than one room. Or drive more than one car, or even take one more than one executive jet… ah… or who knows what this expert on our public services used the monies for. Perhaps just to have more money… or to have a little insurance should our society collapse under the depredations of a business and political elite who apparently don’t give a damn.

He noted that:

“This balance is substantially higher than in the 2007 report because in prior years I had temporarily transferred my loans to another bank before each year end. I had done this on my own initiative over an eight year period,”

And that:

the transfer of the loans between banks did not breach banking or legal regulations. “However it is clear to me, on reflection, that it was inappropriate and unacceptable from a transparency point of view,” he added.

Good Christ.

But, waving the flag for his particular brand of ‘enterprise’ he continued…

“I have made my decision in the best interests of the Bank and all its stakeholders. From the beginning, Anglo Irish Bank was based on a set of beliefs which were pro-business and we achieved great success allowing many new businesses and entrepreneurs realise their potential in Ireland and later overseas. I remain committed to those ideals of access and speed of delivery based on the strength of relationships that should underpin successful banking practice.

Well, you know, Michael Taft would beg to differ on the entrepreneurial issue, and I think he might just be right.

Anyhow, the mea culpa continues;

I am fully responsible for my own decisions and actions and I regret that I had adopted this approach. I have always pursued high standards in my personal and professional life and I failed to meet those standards in this instance.

…’I regret I adopted this approach’…

An approach? He calls it ‘an approach’. Shifting €87 million of his debt off the books periodically in order to… well… what exactly?

And despite all this the Board of Anglo IB said that “…it accepted Mr Fitzpatrick’s resignation with regret”.

But he wasn’t alone…

Lar Bradshaw, a non-executive Director with Anglo, also tendered his resignation. His decision was based on the fact that a loan, which he held jointly with Mr Fitzpatrick, was temporarily transferred to another bank prior to year end, the Anglo statement added.

What would it take, one wonders, for them to give him a kick on the way out.

Anyhow, that glowing reference from the Board, for reference it is, stands testament to the superb system of corporate social welfare extant in our current era. They’re not going to fail, not least because they can be secure in the knowledge that the lender of last resort, the Irish state, will always – but always – step up to the plate should the need arise.

That we all had such support in times of need. It’s a sort of selective Santa. Some will get gifts. Generally those who aren’t doing terribly badly. And the rest? There’s not much left.

So I guess it’s that sort of an economy and that sort of a time we live in.

What is it humanly possible to do with €87 million. You can’t eat more than three square meals a day. Or sleep in more than one room. Or drive more than one car, or even take one more than one executive jet… ah… or who knows what this expert on our public services used the monies for

I believe* that’s this question comes up in Martin Amis’ Money, in which it’s commented that nobody can really tell you why it’s worth having twenty million quid rather than only ten million, what can you possibly do, that’s worth doing, that you couldn’t do already….and yet you can tell that the difference between ten and twenty million is a cool ten million pounds.

[* I’ve not read it: but I recall that somebody told me this about the time the lottery started in the UK, and every bastard conversation was about it for about a year and a half.]